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Auto Enrollment > Mandatory Employee Contributions?

Practice Management
Some employers are responding to pandemic-related economic stresses by suspending employer contributions to employees’ retirement plans and accounts. A recent blog entry notes that some employers are thinking about suspending required employee contributions and asks whether automatic enrollment may not be a better option.
 
In “Replacing Mandatory Employee Contributions with Automatic Enrollment,” a recent post on Cammack Retirement’s “Top of Mind” blog, Michael Webb argues that mandatory contributions “are a necessity for defined benefit plans to ensure proper funding,” regarding defined contribution plans they are most useful when they are the only means of making pre-tax contributions, citing the example of 414(h) pickup contributions for money purchase plans.

Webb posits that in other cases for DC plans, mandatory employee contributions “seem to be dinosaurs.” And he further argues that the marketplace “appears to agree,” noting that they are rare outside of college and university plans. But even in that case, he writes, with some institutions of higher learning reducing or suspending employer contributions questions are beginning to arise concerning mandatory employee contributions.
 
But therein lies some peril, Webb suggests—it risks what he termed “retirement disaster” due to the “double whammy” of no employer contributions and no employee contributions. The answer is automatic enrollment, Webb says, arguing that “these employers should consider replacing their employee mandatory contribution with automatic enrollment.” With auto enrollment, he writes, “employee contributions to the plan are effectively preserved and employees can opt out for any reason.”
 
Webb notes that he considers autoenrollment to be less ideal in one scenario than in others. He writes that with 403(b) plans, if mandatory contributions are made as a condition of employment or due to a one-time irrevocable election, then the contributions do not count against the 402(g) elective deferral limit. Therefore, says Webb, those who can afford it can make a maximum elective deferral as well as a 403(b) mandatory contribution.
 
But even in that case, says Webb, few people are taking advantage of this opportunity to such an extent that eliminating employee mandatory contributions would be harmful, and mandatory contributions are relatively insignificant for those who afford such an arrangement. So, he concludes, the advantages of auto enrollment “far outweigh” obviating that one scenario.